J M Smucker Co (SJM) 2005 Q1 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the J. M. Smucker Company's first quarter 2005 earnings conference call. At this time I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company we will open up the conference up for questions and answers after the presentation. I will now turn the conference over to Mr. Mark Belgya, please go ahead sir.

Thank you. Good morning everyone and welcome to the J. M. Smucker Company first quarter 2005 earnings conference call. I'm the company's VP and Treasurer, and I thank you for joining us this morning. On the call this morning from the Smucker Company is Tim Smucker, Chairman and co-CEO, Richard Smucker, President, co-CEO and CFO, Vince Byrd, our SVP of Consumer Markets, Fred Duncan, SVP of Special Markets, Steve Oakland, VP and GM of our Consumer Oils and Baking Business, Mark Smucker, VP and Managing Director of Canada, and Paul Smucker-Wagstaff, VP and GM of our Foodservice Business. After this brief introduction I'll turn the call over to Richard for opening comments and a recap of the quarter. I will then review the financial results for the quarter, then Tim will close with a discussion on Uncrustables and our outlook for fiscal 2005. At the conclusion of these comments we will be available to answer your questions. If you have not seen our press release it is available on our website at smuckers.com. If you have any follow up questions today, after today's call please feel free to contact Richard or me.

I would like to remind you that certain statements in this presentation and during the question and answer period that follows may relate to future events and expectations and as such constitute forward-looking statements within the meaning of the Private Securities Legislation Reform Act of 1995. I invite you to read the full disclosure statement concerning such forward-looking statements in our press release. Before I turn the cull over to Richard I want to point out that the results of Henry Jones Foods, our Australian business which we divested during the first quarter, and the Multifoods US Foodservice business which we are planning to divest, have been reported as discontinued operations. Accounting rules require that historical financials be reclassified to reflect last year's Henry Jones financial results as discontinued operations. We have included the restated individual quarterly statement for 2004 with our release. If you have any questions regarding this accounting treatment, please feel free to contact me.

With that I'd like to turn the call over to Richard.

Good morning everyone and thank you for joining us. The first quarter marked another period of record financial performance for the company. As you are aware we closed the Multifoods transaction in June, bringing the Pillsbury, Martha White, Hungry Jack, Robin Hood, and Bick's brand into the company's family of brands. We have been pleased with the initial results of these businesses. The organization continues to work hard on integration activities in accordance with our overall plan. Our marketing teams are coming up to speed with each of the brands and we are putting the finishing touches on our fall bake programs. As we mentioned in last quarter's conference call, we reviewed the fall baked plans that were initiated by Multifoods and are excited about the opportunities that they provide. There has been positive response to a number of product introductions under the Pillsbury brand, including Tree Toppers and the Ultimate Dessert Kit. Earlier this month we accomplished our first major integration milestone by completing what we call customer facing. This means the Multifoods U.S. retail business has been integrated into the Smucker's order for cash process with no disruption to our customers. This supports our key integration objective of a seamless transition to our customers. Other key milestones in the coming months include a similar customer facing transition in Canada, the consolidation of supply chain onto a common system in the U.S., and one in Canada, and the closing of the Minnetonka headquarters by the end of our fiscal year.

In looking at our base business we continue to see share of market increases driven by growth in the Smucker's and Jif brands. In our oils and shortenings business it appears Crisco has turned the corner and we are looking forward to a strong fall bake season. We continue to be the branded leader in the category. In terms of strategic initiatives we completed the sale of Henry Jones Foods in Australia and announced our plan to divest of the Multifoods U.S. food service business. Based on preliminary indications, it appears that there is significant interest in this business, and we hope to complete the transaction sometime later this fiscal year. These actions further sharpened our focus on our strategic vision of owning and marketing leading North American icon food brands sold in the center of the store. At our most recent board meeting our directors authorized the company to repurchase up to a million shares. As you know we were restricted from repurchasing shares for a period of two years following the acquisition of the Jif and Crisco brands. This period expired on June 1st of this year. As you can see, we've had a busy, productive, and profitable first quarter.

I'd now like to turn the call back to Mark to have him walk through the financial results with you.

Thank you Richard. Sales for the quarter were nearly 416 million, up 22% compared to last year. Multifoods contributed 75.5 million to sales in the quarter. Sales of the base Smucker business excluding the Multifoods acquisition were equal for the quarter. However, excluding the impact of planned sales declines in our industrial and international business areas, and a decrease in non branded oil sales the company saw a 3% sales in our branded business over prior year. On a GAAP basis income from continuing operations was up 9%. Due to the additional shares issued as part of Multifoods acquisition, earnings per share remained unchanged at 50 cents per share. Excluding restructuring charges and merger integration costs that we detailed in our earnings release, income from continuing operations increased 18% for the corresponding increase in earnings per share of 6%. Earnings per share were 57 cents compared to 54 cents last year.

Our operating income increased 16%, while our operating margin declined from 12.1% to 11.6%, this decrease was due to merger-related costs and an overall increase in restructuring charges this quarter versus a year ago. If you exclude these costs, operating margin remained essentially flat at 13% year to year. Gross margin for the quarter increased from 34.6% to 34.8% partially due to the impact of our supply chain optimization project, or S-COP. As announced previously we closed our Watsonville, California, and Woodburn, Oregon processing plants. Which resulted in an overall overhead reduction. Favorable manufacturing costs and a decrease in restructuring charges also positively impacted gross margin.

SG&A as a percent of sales declined slightly for the quarter excluding both the merger costs and restructuring. During the quarter our marketing and selling expenses were up in absolute dollars but declined as a percent of sales. This was offset somewhat by an increase in administrative expenses resulting from the addition of head quarter costs for Multifoods. As Richard mentioned, the Minnetonka office will close by the end of the fiscal year and we will continue to see a decline in these expenses over the remainder of this year. Other key factors impacting the quarter were increase in interest expense which resulted from the additional debt related to the Multifoods transaction and a decrease in the company's tax rate. Finally the weighted average shares outstanding increased from 50.1 million last year to 54.5 million this quarter reflective of the shares issued as part of the acquisition. You should note that in subsequent quarters the share count will increase since these shares will be outstanding for the full quarter. The company estimates that weighted average shares outstanding of 58 million for the full year.

Now let us take a look at the results of the quarter by our two business segments. Sales in our U.S. retail segment were 288 million up 16% compared to last year with Multifoods contributing nearly $40 million. In our consumer business area sales were up 11% for the quarter driven by growth in the Smucker's and Jif brand, the addition of Hungry Jack, and continued growth of Uncrustables. In the consumer oils and baking area sales were up 29% due to the addition of the Pillsbury, Martha White, and Pet brand. Retail sales in the oil business were down 6% compared to last year but this was an improvement from the 19% decline in the fourth quarter of 2004. Our total oil and shortening sales were down 12% in the quarter due to a sharp decline in lower margin industrial oil sales. In our special market segment sales were up 37% compared to last year. The addition of Multifoods contributed 35.6 million to the segment's overall growth. The segment's performance also included planned sales decreases in our industrial and international areas. If you exclude these planned declines and the Multifoods contribution, special market sales increased 4% in the quarter.

With that I'd like to now turn the call over to Tim.

Thank you, Mark, and good morning, everyone. First I would like to emphasize how pleased we are in terms of the initial results of the Multifoods acquisition and the progress we have made to date with the integration. The dedicated efforts of all of our employees are greatly appreciated. I would like to spend a few moments updating you on the current status of Uncrustables and our plant in Scottsville, Kentucky. The most important point is that consumer response to Uncrustables continues to be strong and we remain very excited about the growth platform that Uncrustables offers. As we've discussed on several occasions we needed an additional production capacity to meet our growth objectives. Our new facility will provide the necessary capacity and ensure a much improved cost structure to allow us to profitably grow the Uncrustables brand. To accomplish this we designed a state-of-the-art facility which includes an integrated baking and sandwich making operation. This plant opened on time in May. While we planned for an aggressive three-month phased in start-up we have not been able to ramp up the production as quickly as we had previously anticipated. Although we are baking bread and making sandwiches we have not hit the throughput rates that ultimately this plant will achieve. We anticipate reaching our expected production levels at the end of the third quarter. Because of this learning curve we anticipate additional start-up costs consisting primarily of engineering, incremental labor, material, and under-absorbed overhead. We view this ramp-up issue as a short-term concern. In the long run this facility will provide the production that will allow us to meet the growth and profit objectives we have for Uncrustables. We continue to support uncrustables in the retail channel with significant marketing spending and expect to fully supply our retail customers. We are working to minimize the impact to our school customers.

Now let me comment on 2005. We remain committed to our statement made in June of increasing our earnings per share from continuing operations by our stated long-term annualized growth goal of 8%. This equates to a growth rate for 2005 of approximately 24% on earnings from continuing operations. An increase of approximately 8 million shares issued as part of the Multifoods acquisition account for the difference in the growth rate. We have discussed the additional costs for Scottsville. We intend to offset these expenses with cost reductions across the company, and like other food companies we are faced with increase in raw material costs. In our case, we project higher costs for certain fruit varieties and rising fuel costs which will impact our packaging. We are evaluating various alternatives to address the financial impact and would expect to offset these costs over the remainder of the year through a variety of cost reductions and pricing measures. With the treatment of Multifoods U.S. business as a discontinued operation, we will not include their sales as part of the company's consolidated results. Therefore, the forecasted revenues for the year have been revised to approximately 2.1 billion. To summarize our position on 2005 earnings, we remain committed to our strategic guidance of growing our earnings per share from continuing operations by 8% over last year's results. In closing, let me summarize some key points.

First, we achieved record financial results for the quarter. Second, the integration of Multifoods is on track, and we remain comfortable with our synergy projections. Third, we continue to refine our portfolio with a focus on our strategy. Fourth, we are excited about our family of brands and the strong platform for growth that they provide. Fifth, we remain enthusiastic about the prospects for Uncrustables and look forward to expanding production at Scottsville. And sixth, we remain committed to our 2005 guidance. We have always maintained a strong focus on the consumer. We listen to them and respond to what we hear them saying. That has always been the key to our ability to grow and nurture our brands. I think it's important to share with you that at our recent shareholders meeting we were presented a seal of approval award by the Parents Television Council in recognition of our commitment to advertise only on family-friendly programs. Reactions from consumers to this award has been astounding with over 2300 e-mails received to date. Recognition such as this is particularly gratifying since it is at the core of how we build brands. High quality messages reaching our consumers and defining our products.

We are on track for another year of record results and positioned to act upon the opportunities that our brands have. We thank our employees for their ongoing dedicated support and look forward to a productive year. We thank you today for your time and now are happy to answer any of your questions.

Thank you, gentlemen. The question-and-answer session will begin at this time. If you are using a speakerphone, please remove your mute function to allow your signal to reach our equipment. Should you have a question please press star 1 on your push button telephone at this time. If you wish to withdraw your question please press the pound key. Your question will be taken in the order that it received. Please stand by for the first question. Our first question will come from John McMillin of Prudential Securities.

Good morning everybody.

Hi, John.

I'll try to keep this conference call family friendly as well.

[LAUGHTER]

Your basic earnings guidance, or your assumed earnings guidance, is 8% growth off a 236 base getting to some kind of 255 operating number excluding the merger and non-operating related charges. Is that essential right?

That is correct, John.

Okay. And the lower sales guidance of 2.1 billion simply reflects the timing of the Multifoods acquisition, is that right?

It actually is more reflective of the fact that because we are treating the Multifoods foodservice business as a discontinued operation that no longer gets included in our sales numbers, so we have stripped that out, so that's the reduction down to 2.1 billion.

Thanks, Mark. Then if I could ask Mr. Oakland a question just regarding Crisco, because I guess that remains kind of the major drag on results, and, you know, I guess you can quote sales being down 6%, but there's been some major pricing taken in this business. Can I just get, you know, what volumes were down in both retail sales and in total sales? Because it would seem to me that the volume decline is much worse.

Hi, John. Steve Oakland.

Hi, Steve.

The volume decline is slightly worse than that, but the other sales decline that we incurred for the quarter is sort of the timing of our industrial business. There's a Industrial business that came with this from proctor that's a Methyl Ester business that is very tied to the energy bill, so some of the top line decline comes from that, and that will come back in the third quarter. That business is on the books but it is very -- just timing related. We are down more in tonnage. Part of the reason for that is, if you look at last year's comparison, last year was our first summer quarter with this business. We thought it was important to come out strong, and we had a large multi-brand marketing event. We've moved that event now to the fourth quarter so we've moved some of our promotional spending from the first quarter to the fourth quarter and we have -- that's to ensure we have the funds in the fourth quarter to support the business at a time when we think is much more efficient spend.

And have you been at a competitive -- it seems like ConAgra has gained a lot of share back. And I don't know, A lot of this business, and correct me if I'm wrong, is the timing of soy bean oil purchases, which it seems to me they did better, and I know you're not going to talk about hedge positions and so forth, but how long do you feel this competitive disadvantage will last?

I think we saw that turn around, and that was in Richard's comments. As we saw that turn around in the first quarter those pricing changes went through probably June and as we went into July, in fact, we use IRI to track pricing across the country and our pricing is at our below our competitors, and that's from a retail shelf price and from a list price. So our competitor, our key competitor currently is list price is above ours. So there is timing involved. There has been a tremendous amount, an unprecedented amount of price change in this category over the last two years but currently we see our pricing very favorable and we look forward to a solid fall bake, and a solid fall bake against pretty tough comparisons. So last year we had a very good fall bake and we feel very good about that.

And Steve my last question, I think it can be said that having Jif peanut butter made your existing jam business even better. Can you tell me why having other baking products like Pillsbury mix and Martha White, and so forth, why it might make Crisco better?

Sure. We see a number of multi-brand merchandising events, and these categories do very well when they're merchandised. And Jif and Crisco -- excuse me, Jif and Smucker have done a great job of that, and we think by Easter of this year we'll start to see the first promotion where we can merchandise Crisco, Pillsbury flower, Pillsbury baking mixes, and in the southern markets where a lot of the vegetable oil is sold, Martha White is a key brand in a merchandise way.

Okay, thank you.

Thank you Mr. McMillin, next we'll hear from George Askew of Legg Mason.

Yes, thank you very much. Let's see. Couple of questions. Regarding the Uncrustables plant you went into a high level of detail on some of the issues facing the Scottsville plant there. Can you give us a sense, are the second quarter start-up costs going to be greater than the first quarter costs were, the incremental costs?

We expect we'll have some additional costs similar but we would hope that they're not greater, but at this point in time we're not exactly sure.

Okay. The Uncrustables by variety, can you give us a sense of, you know, how the -- how the ten-pack is selling, for example, which I've seen in the super centers, how grilled cheese is doing? Are you seeing weakness in any particular line? Or is the manufacturing issue related to a particular line or is it just more- you know throughput throughout the brand?

George, this is Vince Byrd. In terms of the performance at retail, of course, grape is the number one seller, strawberry's number two, and the ten-pack, which was introduced, and even a larger pack at the request of certain customers, is doing very, very well, and they coexist on the shelf together. The grilled cheese, quite frankly, because of the production supply chain issues that we had last year, and the pull-back of support that we spoke to earlier, quite frankly has affected that business but we're not overly concerned about it because for all intents and purposes we're going to relaunch that product this fiscal year, and there have been some reports of some accounts discontinuing it but again it's primarily because we had pulled support on the product. But we are not discouraged, our initial test market results of that product were very, very encouraging.

Do the production issues at Scottsville affect the new product pipeline in that brand?

Yes, it will. Only in the sense that it has delayed some of our timing. We had hoped by the end of this year we might have some, like in the fourth quarter, another product to introduce but we're going to have to delay that probably by about a six-month period of time.

You say fourth quarter. You're saying fiscal quarter, I assume.

Correct. Yes.

Okay, the lower tax rate in Canada, well, I should say the lower tax rate, I'm assuming that Canada played a role in that. How sustainable would a lower -- is a lower tax rate potentially for this year and going forward?

You're correct. This is Mark. The addition of Multifoods and the presence they had in Canada offered up some opportunities to reduce our taxes, and we would expect the decrease that you saw in this quarter continuing into -- throughout the rest of this year.

Good. The organic issue at Santa Cruz, can you clarify that, was it just simply the inability to find organic grapes or organic apple, and would that be an impact for the full year, or is that a short-term issue?

It was a short-term issue. Basically it was just availability of organic apples that affected our organic apple juice and apple sauce however, we're back in supply. We have positioned some promotions and expect to make up the shortfall in the second and third quarter.

When you refer to higher fruit costs is that the specific issue or is there something else going on there?

In parts it relates to organic apples but it also affects other fruits.

You mean fruits in general.

Yes, it's other fruits.

Can you characterize that for me, then I'll get off the phone.

Red raspberry would be a key one, what we call the cane berries. Red raspberries, black raspberries, and boisenberries some of those are up significantly.

Okay awesome, thank you.

Thank you Mr. Askew. Our next question will come from Farha Aslam with Merrill Lynch.

Hi good morning.

Hi Farha

A couple questions. Just to go back to John McMillin's question, the 8% growth, the base for that, are you seeing the 240 excluding extraordinary? That would get to you 260, and I think you had discussed 255. So I just want to clarify those two numbers.

Sure, Farha this is Mark. I'll walk you through it, and I guess before I walk through it I'll just make it clear that this is consistent with the same discussion we had at our fourth quarter call.

Okay.

What we did, if you recall our '04 non-GAAP, if you will, earnings per share were $2.42, and we identified two, what we deemed as nonrecurring events, one being the discontinuance of the Henry Jones business, and also we had a two cent per share gain on the sale of our Watsonville plant. So in total that was six cents. So from a continuing operations view point, we went from 2.42 to 2.36 and it's that 2.36 that we are basing our 8% growth on top of.

And the Uncrustables issues at the plant, about how much on a percentage basis do you think you'll have to scale back in the second quarter on supplying the schools?

I think first off, this is Paul Wagstaff, by the way.

Hi, Paul.

We expect to fully supply our retail business, just to confirm that. And then on the school side we're working on a case by case basis with our school customers and at this point we're planning to minimize the impact to them.

Are you at all cutting back on the number of schools-- districts you'll expand to because of that production issue?

Yeah, the answer to that is yes, we are, but at the same time we are working with the individual school districts and feel comfortable that we're going to achieve the numbers in the long term.

But for 2005 fiscal year, how much do you think this production issue is going to impact the top-line growth of Uncrustables? Will it shave a point or two off the growth? Or do you think you're going to be able to overcome the issues quickly enough so that growth won't be impacted on the top line?

This is Mark. To speak to that, we really aren't going to get into talking about specific reductions. The key take-away is that we are going to continue to fully supply the retail channel and in total we do expect Uncrustables recognizing a significant growth over '04.

Okay and just on your restructuring charges could you share with us just exactly what is in the restructuring charges and what is not? I know you said your plant rationalizations are in the numbers as well as your SKU rationalizations. Is the Uncrustables plant part of the restructuring charges, or do you put that through normal operations?

That's a good question. I recognize it's a bit confusing. Our restructuring charges do not include any of the Uncrustables. That goes through regular operation expenses. What is included is our previously announced S-Cop, we mentioned Woodburn and Watsonville as an example. Also we reference in our release today, that we also sort of added on to that. We are relocating some portion control business from Salinas, California plant to our to Orrville and to Memphis, so charges primarily relocation of equipment, employee transition costs those types would also be included as part of that restructuring.

Great. This is helpful. Thank you very much.

Thank you.

Thank you Ms. Aslam. Next we'll here from Christina McGlone of Deutsche Bank. Ms. McGlone, your line is open. Please go ahead.

Come back to Christine?

We'll move on to Mark Chekanow of Sidoti & Company.

Good morning. Now granted you're headed into the fall bake season and these-- the Pillsbury programs that are in place are not your own, but I would imagine you are now having better insight into the competitive channel with the relationships with your brokers and your customers etcetera. Do you expect another massive, heavy promotional period in the bake season from Duncan and or Betty Crocker in the same way that Multifoods got really hurt last year?

Hi, Mark. Steve Oakland. Obviously fall bake is always very competitive in these categories, especially cake mix and those in the flour business. But, no, it appears that Multifoods did a great job. The plans are in place, the price points are right, they have the merchandising with the key customers, and in addition to that they've got some great new items, and some new items that are exceeding their initial forecast. So between those new items and the plans in place we think they'll meet what we have planned for and probably exceed it.

I guess in more detail my question was last year they had also looked like they were picking up momentum but it was not during the fall bake season when it really counted, then they got kind of blindsided. What I'm asking, do you think there is a change--a pick up in some positive momentum so far this year but is your competitive intelligence pointing to another real big ramp up versus the nonbake season?

You know, no, I don't think so. Again, I think it's going to be very competitive, but the Multifoods folks had contingencies in there for that and were planning against that. Given their experience a year ago they built their plans expecting the most competitive environment and I think we're prepared for that. So --.

Okay. You talked about the Crisco business but you didn't get very specific with volume or sales trends in peanut butter or fruit spreads. Can you talk a little bit more about what you're seeing in peanut butter and what kind of growth rates we're seeing split between I guess, traditional, and I would assume that the natural is still providing a much faster growth rate.

sure, this is Vince. I'll make a couple of comments. First, the information, of course, that is public as we've stated before, is not reflective of our total business because those segments are not recorded as syndicated data. Overall we're very pleased with our spread results. If you look for the year that we just completed we were up over double digits. If you compared last year's first quarter, we were up double digit to nearly 15% in last year's first quarter and spread and peanut butter specifically. And in the first quarter of this year we're very pleased with the results. They're in line with our growth expectations. There has been -- clearly the natural peanut butter has been growing, as you've probably seen in the numbers. More so than the Jif brand, but again, long term we're very, very happy with this business.

Okay. Then you talked about some of the inflationary pressures and some of the cost reductions you're going to try and implement to offset it. Could you be more specific with the cost reductions?

Mark, this is Mark. At this time it's obviously very early in our year and we're quite comfortable that we'll go across the organization and challenge the organization as we always do just to identify costs in our budgets plant spending etcetera, to offset the impact of those increases.

And you're also comfortable with pricing, that any pricing you would take wouldn't presumably hurt your market share?

That would be our intent, definitely.

Thank you.

Thanks.

Thank you Mr. Chekanow. And once again we'll be moving back to Christina McGlone of Deutsche Bank.

Hi can you hear me?

Yeah. Welcome back.

Thank you.

Literally.

Forgot how to use the phone while I was away.

Well glad to have you back,

I guess first questions in terms of Uncrustables and just going through the profitability status it was my understanding that Uncrustables were not profitable and were not expected to be until the plant was up and running. And I guess you were going to overlap with other facilities until you felt comfortable. Now I'm wondering if this is going to be the case until I think Tim said the end of the third quarter, so really we're not looking at profitable Uncrustables until the fourth quarter. Am I thinking about that correctly?

I think perhaps the better way to look at it, Christina is that we said that in '05 we would eventually get the profitability under our original plan. Now with the timing of the ramp up I would say that 2006 is when we would expect to see the line go profitable.

Okay. And then I guess just moving to the foodservice sector I was wondering, some of the other companies have been talking about a weakening foodservice sector and I'm wondering if that's affecting your portion control business at all or if you expect it to?

Hi, this is Paul Wagstaff. Regarding that question, no, we have not seen any softening of our PC business, in fact that business is very strong at this point. and we expect that momentum to continue.

So you're not really seeing the weakness that other people have talked about?

No, we are not.

And then I guess, last question, Mark, I was wondering, the industrial pruning, is that weighted towards any particular quarter? Is it pretty evenly spread out throughout the year again?

From this point forward it's going to be fairly evenly spread out this quarter was a little heavier but I think we said that $11 million for the whole year so you should see the difference fairly spread over three-quarters.

Alright thank you very much.

Thank you.

Thank you, Ms. McGlone. Next,we'll hear from Scott Van Winkle of Adams Harkness Hill.

Hi guys, a couple of questions First on the gross margin can you quantify the negative impact from consolidating IMC that was offset by your own improvements in house I assume that was the case.

We really can't, Scott. What I would say to that is, and we've said since I think the outset is that we will see an overall reduction in our gross margins because of the Multifoods addition, probably a couple hundred basis point is what we said. I think you saw part of that. Obviously we've only owned the business for half a quarter, that will be impacted more next quarter.

On the foodservice business at IMC, was the seasonality there any different than the rest of that business?

I would say it was pretty similar to what you see in the traditional IMC grocery business.

Okay. And the margin improvements you mentioned on the gross margin during this quarter, did that include, even though you weren't up to where you expected to be does that include the Scottsville facility as well? I'm sorry, I didn't catch that.

I'm sorry, Scott, the first part of your question --.

You mentioned the improvement in gross margin during the quarter year-over-year driven by your manufacturing moves. Does that include Scottsville? Did it have a positive contribution even though it wasn't quite up to where you thought it would be?

No, the Scottsville cost wasn't included in cost of manufacture, so it was included in that so we had improvement despite that.

Okay. And on the Uncrustables, you probably won't answer this, but I was wondering if you could give us an idea where you ultimately thought the mix would be between consumers and schools.

From that standpoint it's 50/50. We expected retail to be about 50% of the business and schools about 50%.

Okay. Thank you.

Thank you, Mr. Van Winkle. Moving on to Ann Gurkin of Davenport.

Good morning.

Good morning.

Hi Ann.

Just a couple of things. Can you give me the total cost you expect to open the Scottsville plant this year?

That's not a number that we're sharing at this point.

Last quarter I had heard like 4 to 5 cents. So it's going up from that?

Last year we said the total we thought it was going to be about 7 cents. Part of that was going to be last year and a little bit this year. Most of that was last year, some this year. More than we anticipated this year.

Okay. Can you still reach operating margin in the range of 13% to 14% in 2006, fiscal '06?

In that brand?

In that range for the company.

For the company. Well I think what we've said, Ann, is that we would get back to more of that range three years after the transaction.

Okay.

Which would be '07.

Okay. And then I was wondering if you could just help me, looking at the balance sheet and the inventory balance, can you just tell me what would be like a normal level? Is it high right now? Can you just help me a little bit with that?

Yes. It's probably a little high right now. I would suspect you'll see it increase even in the second quarter as we continue to build some for fall bake and then it will level off over the last half of the year. And that's pretty much the traditional movement of our inventory balances.

Okay, that's helpful. Thank you very much.

And fruit costs also will impact that being up.

Okay.

Thank you, Ms. Gurkin. And I would like to remind today's telephone audience that if you do have a question, please press star 1 on your touchtone telephone at this time. Next we'll hear from Bob Cummins with Shields & Company.

Good morning everybody.

Hi Bob.

With regard to the international Multifoods acquisition I think you've indicated that excluding integration costs you thought that the acquisition most likely would be accretive to earnings during your first fiscal year, and I'm wondering if that thinking is still on plan and maybe you could give us some idea of magnitude of what the cents per share impact might be on your earnings, again disregarding the one-time expenses.

We've said it would be modest but we still expect it to be what we said at the end of the fourth quarter last year but it was modest we said in the first year.

But you prefer not to quantify your expectation, then?

That's correct.

Okay. Fine. Thank you.

Thank you, Mr. Cummins. Gentlemen, we do have a follow-up from Mark Chekanow, Sidoti & Company.

To follow up on that 13 to 14% operating margin you had originally talked about yet getting back to there in three years and putting that in fiscal '07, but doesn't that change a little bit now that you have planned to divest the foodservice business, which is essentially a very low margin business. Wouldn't you expect to get there a little quicker then?

Well Mark, certainly the divestiture of Multifoods service will improve our operating margin but taking into account some of the things that have happened since we've made some of the original comments, particularly we've mentioned the cost increases in some of the Scottsville. So at this point we're still committed to our three-year time frame. Certainly we're going to try to move forward quicker depending on how the synergy is yield, but I think we'd rather stick right now to our three year time frame.

Great, thank you.

Thank you Mr. Chekanow. Gentlemen, we also have a follow-up from George Askew of Legg Mason.

Yes, thanks. You mentioned in the comments and also in the release that you're going to offset some of the cost pressures with some pricing actions. I know you may not want to be too specific, but are they going to be, you know, if raspberries-- fruit costs are higher, we'll target raspberry as a variety for pricing, or is there a broader price action that we should look for?

We're evaluating a number of alternatives right now, and as Mark went over earlier the cost of increases that we're experiencing are beyond just fruit.

Yeah.

So we are looking at a little bit broader than just those specific fruits.

Gotcha. Thank you.

Thank you, Mr. Askew. Gentlemen, we have a first time question from Bob Simonson of William Blair.

Morning. Two questions, first, the SKU elimination program that you've been going through, is that a continuous or discrete function where even next year you could be culling things and of perhaps what magnitude, or is it largely over after this year?

That's an ongoing thing, Bob. We continue to do that. It's a discipline that we have to stay on all the time, because as you develop new products, some are successful, some aren't, and so it's a continual thing.

Is that something that you kind of think about as maybe taking X% off your sales each year or is it not quantifiable in that regard?

No, I think the ones that we take off really hadn't been -- haven't been productive. Excuse me.

Second question is, you have your share authorization for repurchase. Have you bought any yet? It's hard with the [NMC] shares. Have you bought any since the end of the fiscal year? And the second part of that is, is that a function of just the price of your shares? Is it a function in part of proceeds from the asset sales, or can you give some color on that program?

We just had approval at our board meeting about a week and a half ago, and so we haven't started the program yet. But it really -- we don't have to -- we have plenty of cash, but if we want to make purchases we can do so without having to sell anything.

Okay. So it's not a function of the asset sales or the current balance?

That's correct.

How much is just the -- does it have to be an accretive purchase? Does it have to be neutral? How do you think about it?

Well, we look at those things, but to be honest, right now it would be accretive.

Very good. Thank you.

Thank you Bob.

Gentlemen, at this point there are no further questions. I'll now turn the conference back over to you for any additional or closing remarks.

Well, again, thank you very much for your time, your interest, and participating on our conference call. Have a great day.

That does conclude today's conference. We do thank you for your participation.